Spanish Unemployment Trends Lower
Markit Economics has just published the Purchasing Managers Index (PMI) for the Spanish Services sector. A sizable improvement is noted this month, the reading is at 56.5, up from the March number of 54.0 and also easily ahead of the 54.4 market expectation.
Spanish authorities have at the same time released details of this month’s Unemployment Change statistic which has shown an improvement of 111.6k on the previous reading. March’s improvement was just 16.6k while the consensus estimate for the April reading was for an unemployment reduction of 49.1k.
Unemployment in Spain is currently the second highest in the entire Eurozone at just under 26%. Despite this the Spanish bond market has been in overdrive recently, yields on 10 year new issues are now below 3%, a level not seen in almost 10 years while 3 year new issues are showing yields below their equivalent US treasuries. There are three reasons why a country in such a precarious economic situation is having it’s debt issues snapped up. All relate back to the European Central Bank (ECB).
Firstly, the ECB President, Mario Draghi, emphatically stated two years ago that the bank would do “whatever it takes” in order to support Eurozone member economies. This is more an offer of assistance rather than any kind of guarantee but nonetheless it offers a level of comfort to bond investors.
Secondly, the Bank is as close as it ever has been to embarking on a program of quantitative easing within the Eurozone. This will take the form of the ECB purchasing large quantities of government bonds in the secondary markets, the primary goal being to flood the markets with cash but a secondary side effect will be to drive up bond prices.
Finally, although not direct action of the ECB, the low inflation rate in the Eurozone makes holding Euro denominated bonds a very attractive prospect.
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